Summary of Things You Should Know Before Buying Stocks

Doing the needed research on the stock market and its processes may seem daunting to the average Joe— can’t we all just throw our money into the stock market and get rich?

But unless you plan to employ the services of fund managers or a carefully picked ETF, you’ll want to learn as much as you can about the stocks you choose to invest in.

While we have considered many of these individually, here’s a summary of the information you need to have before kick-starting the process.

What The Company Does

A rule of thumb is to invest only in markets you understand and our investor extraordinaire, Warren Buffet, sticks to this rule judiciously. If a report on the company’s business processes makes your head spin, then you should take the time to get familiar with them or find another business to invest in.

Earning Growth

Although everyone says “past performance does not guarantee future profits” and rightly so, the fact remains that if a stock consistently performs well, then the company knows what they are doing.

Those are the companies you want to invest in. However, this does not discount the fact that the stock market is volatile and companies’ stocks rise and fall, but consistent growth over a long period of time is usually a good sign.

Price-To-Earnings Ratio

P/E ratio is the ratio of a stock’s price to its earnings. It is used to determine how much investors are willing to pay for each dollar of earnings at a particular time.

Companies with high P/E ratios are believed to be set for rapid growth in the future, while companies with low P/E ratios may not be growing all that fast or at all. The price-to-earnings ratio can be calculated by dividing the market value per share by the earnings per share.

Dividends

Stocks that pay dividends perform better in the long run than those that don’t. A company’s ability to pay regular dividend hints at its financial health and solid management.

Look for companies that regularly increase their dividend over time, but beware of too-good-to-be-true yields, they usually are.

Impact

Companies that have positive social impact tend to go farther than those that don’t. World’s richest man, Jeff Bezos, invests in companies that positively impact people’s lives— this includes a number of biomedical companies.

Improving people’s standard of living and providing essential services have the most impact at a population level. Measuring impact requires numerical data and anecdotal stories, but positive impact usually comes with positive press which means higher share prices...and more money for you.

Debt-equity ratio

Average people to be averse to debt. So when a company has some debt on its balance sheet, we avoid them like the plague. But debt isn’t necessarily bad— if you know how to manage it.

The debt-equity ratio is calculated by dividing a company’s liabilities by shareholder’s equity. Companies with high debt-equity ratios are a riskier investment, so it’s safer to stick with companies with low D/E ratios.

Company Management

A company’s leadership has a large influence on how well the company performs. While you have no control over who runs the company you invest in or what management methods they use, you can research the people in charge.

You can check their track record; the most competent managers usually have years of experience and a good track record to show.

This list is in no way exhaustive, but it takes a lot of guesswork out of picking stocks and is overall a good start.

Written by Lawretta Egba.